Question

You are planning to buy a nice gift for your close friend 2 years later when she turns 20 years old. The gift will cost $700 by then.

a) If your saving account pays 6.5% interest rate per annum and you decide to deposit a single lump sum amount today, how much do you need to put down so you are able to accumulate $700 two years later?

b) If you are able to make 3 annual deposits of $100, $200, and $300 starting from today, and your saving account still pays 6.5% interest rate per annum, would you be able to have enough money to buy that gift?

Answer 1

a) Using the financial calculator,

N= 2

I/Y = 6.5%

PMT = 0

FV = $700

PV = $617.16

Now, we will need to put $617.16 to get the $700 after 2 years

b) In this case, we need to individually calculate the value of each deposit and add up to find the total value

Deposit 1 = $100

N= 3

I/Y = 6.5%

PMT = 0

PV = $100

FV = $120.794

Deposit 2 = $200

N= 2

I/Y = 6.5%

PMT = 0

PV = $200

FV = $226.845

Deposit 3 = $300

N= 1

I/Y = 6.5%

PMT = 0

PV = $300

FV = $319.5

Total value of the investment = 120.794+226.845+319.5

= $667.139

No , we will not be able to match upto $700, we have to put $32.861 extra to buy this gift.